September 14, 2010

The Active versus Passive Decision

The following is an excerpt from The Investment Answer. It's a small, easy read with very nicely designed charts and graphs (which I couldn't put in a post so I have included them in red below.) Much of what the authors say here are reasons why I choose to invest in index funds. If you've ever wondered why passive investing beats active investing, this article is for you.

Active Investing

Active managers attempt to “beat the market” (or their relevant benchmarks) through a variety of techniques such as stock picking and market timing. In contrast, passive managers avoid subjective forecasts, take a longer-term view, and work to deliver market-like returns.

The Efficient Markets Hypothesis asserts that no investor will consistently beat the market over long periods except by chance. Active managers test this hypothesis every day through their efforts to outperform their benchmarks and deliver superior risk-adjusted returns. The preponderance of evidence shows that their efforts are unsuccessful.

[The list below] shows the percentage of actively managed equity mutual funds that failed to outperform their respective benchmarks for the five-year period ending December 31, 2009. The message here is that most funds failed to beat their respective benchmarks. (If international small-cap managers had been correctly compared to an index that included emerging markets, the rate of underperformance would rise to the 70 to 80 percent range, which is in line with the other categories.)

Source: Standard & Poor’s Indices Versus Active Funds Scorecard, March 30, 2010. Indicies used for comparison: US Large Cap—S&P 500 Index, US Mid Cap—S&P Mid Cap 400 Index, US Small Cap—S&P Small Cap Index, Global Funds—S&P Global 1200 Index, International—S&P 700 Index, International Small—S&P Developed ex.-US Small Cap Index, Emerging Markets—S&P IFCI Composite. Data for the SPIVA study is from the CRSP Survior-Bias-Free US Mutual Fund Database. Results are net of fees and expenses. Indices are not available for direct investment.

Active managers attempt to outperform the market (or a benchmark index) by assembling a portfolio that is different from the market. Active managers think they can beat the market through superior analysis and research. Sometimes, these managers consider fundamental factors such as accounting data or economic statistics. Others will perform technical analysis using charts and graphs of historical prices, trading volume, or other indicators, believing these are predictive of future price movements.

For the most part, in an attempt to beat their benchmarks, active managers will make concentrated bets by holding only those securities they think will be the top performers and rejecting the rest. This approach, of course, comes at the expense of diversification. It also makes it difficult to use active strategies in a portfolio to reliably capture the returns of a target asset class or control a portfolio’s overall allocation.

Studies show that the returns of active managers can be very different from their benchmarks, and their portfolios often overlap across multiple asset classes.

There are two primary ways that active managers try to beat the market: (1) Market timing, and (2) Security selection.

Market timers attempt to predict the future direction of market prices and place a bet accordingly. Because no one can reliably predict the future, it should come as no surprise that the overwhelming evidence suggests market timing is a losing proposition.

Another reason it is so hard to time markets is that markets tend to have bursts of large gains (or losses) that are concentrated in a relatively small number of trading days. [The information below] shows that if an investor misses just a few of the best performing trading days, he loses a large percentage of the market’s total returns. We believe it is impossible to predict ahead of time when the best (or worst) days will occur.

The other active management technique is security selection (or stock picking). This involves attempting to identify securities that are mispriced by the market with the hope that the pricing error will soon correct itself and the securities will outperform. In Wall Street parlance, an active manager considers a security to be either undervalued, overvalued, or fairly valued. Active managers buy the securities they think are undervalued (the potential “winners”) and sell those they think are overvalued (the potential “losers”).

You should know that whenever you buy or sell a security, you are making a bet. You are trading against the view of many market participants who may have better information than you do. When markets are working properly, all known information is reflected in market prices, so your bet has about a 50% chance of beating the market (and less after costs are taken into account).

Again, Wall Street and the media have a vested interest in leading us to believe that we can beat the market if we are smarter and harder-working than others. Yet, through today’s technological advances, new information is readily available and becomes almost instantly reflected in securities prices. Markets work because no single investor can reliably profit at the expense of other investors.

The idea that prices reflect all the knowledge and expectations of investors is known in academic circles as the Efficient Markets Hypothesis, which was developed by Professor Eugene Fama of the University of Chicago Booth School of Business.

The Efficient Markets Hypothesis is sometimes misinterpreted as meaning that market prices are always correct. This is not the case. A properly functioning market may get prices wrong for a time, but it does so randomly and unpredictably such that no investor can systematically outperform other investors, or the market as a whole.

Finding the Winning Managers

Still, many investors want to believe that they will be able to beat the market if they can identify a smarter, harder-working, and more talented manager — a Roger Federer or Michael Jordan of money management. Of course, it is easy to find a top performer after the fact. They are then held out as “geniuses” by the media. But how do you identify tomorrow’s top managers before they have their run of good performance?

The most common method is by examining past performance, the theory being that good past performance must mean good future performance. Financial magazines like Forbes, and rating services such as Morningstar, love to publish this data as these are some of their best selling issues. Mutual fund companies are also quick to advertise their best performing “hot funds” because this attracts new money from investors. Despite all of this activity, there is little evidence to suggest that past performance is indicative of future performance.

Passive Investing

A more sensible approach to investing is passive investing. This is based on the belief that markets are efficient and extremely difficult to beat, especially after costs. Passive managers seek to deliver the returns of an asset class or sector of the market. They do this by investing very broadly in all, or a large portion of, the securities of a target asset class.

The best known (but not the only) method of passive investing is called indexing, which involves a manager purchasing all of the securities in a benchmark index in the exact proportions as the index. The manager then tracks (or replicates) the results of that benchmark, index less any operating costs. The most popular benchmark index is the S&P 500, which is comprised of 500 U.S. large cap stocks that currently make up about 70 percent of the market capitalization of the U.S. stock market.

Cash Drag

Because active managers are always looking for the next winner, they tend to keep more cash on hand so they can move quickly when the next (perceived) great investment opportunity arises. Since the return on short-term cash investments is generally much less than that of riskier asset classes like equities, holding these higher cash levels can end up reducing an active manager’s returns. Passive managers are more fully invested, which means that more of your money is working for you all the time.

Consistency

Another advantage of passive investing is that you and your advisor can select a group of asset classes that work well together like the efficient building blocks of a portfolio. Done correctly, the building blocks will have few securities in common (called cross-holdings) and the risk and return profiles of each will be unique.

Sometimes an active manager will change his investment style in an attempt to beat his benchmark. For example, a large cap value manager may suddenly start purchasing large growth stocks if he feels that large growth stocks are about to take off. This “style drift” can be problematic, especially if you already have a large growth fund in your portfolio. In this case, you would now have overlapping risk and less diversification. Trying to build a portfolio using active managers causes you to lose control of the diversification decision.

Costs Matter

One explanation for the underperformance of active management was set forth by Nobel Laureate William Sharpe of Stanford University.

Sharpe ingeniously pointed out that, as a group, active managers must always underperform passive managers. This is because investors as a whole can earn no more than the total return of the market (there is only so much juice in an orange). Since active managers’ costs are higher— they pay more for trading and research — it follows that the return after costs from active managers as a group must be lower than that of passive managers.

This holds true for every asset class, even supposedly less-efficient ones like small-cap and emerging markets, where it is often said that active managers have an edge because information is less available. Sharpe’s observation confirms that because of their higher costs in these markets, active managers should collectively underperform by more than in larger, more widely traded markets — the opposite of convention wisdom.

The higher costs of active management can be broken down into three categories:

1. Higher manager expenses. It is more costly for an active manager to employ high-priced research analysts, technicians, and economists, all of whom are searching for the next great investment idea. Other active management costs include fund marketing and sales costs, such as 12b-1 fees and loads, to attract money from investors or to get Wall Street brokers to sell their funds. The expense differential between active and passive approaches to investing can exceed one percent per year.

2. Increased turnover. As active managers try to provide superior returns, they tend to trade more often and more aggressively than passive managers. This usually means paying greater brokerage commissions, which are passed on to shareholders in the form of reduced returns. It also means that market-impact costs can increase dramatically. When an active manager is motivated to buy or sell, he may have to pay up significantly in order to execute the transaction quickly or in large volume (think of a motivated buyer or seller in real estate).

These higher market-impact costs are more prevalent in less liquid areas of the market such as small cap and emerging markets stocks. It is not uncommon for turnover in actively managed funds to exceed that of index funds by four times or more. The extra trading costs for active management can exceed one percent per year.

3. Greater tax exposure. Given that active managers trade more often, it follows that taxable investors will incur accelerated capital gains as a result. Remember, if your mutual fund sells a security for a gain, that profit may be passed on to you as a taxable distribution. For securities held longer than one year, you would pay the long-term capital gains rate, while short-term capital gains would apply for securities held less than one year. The additional taxes due to accelerated capital gains generated by active managers may exceed one percent per year.

It is important to understand that of these three categories, typically only manager expenses are disclosed to investors. These are usually expressed as a percentage of net asset value in the case of a mutual fund, and is called the operating expense of the fund. For actively managed equity funds, the average operating expense ratio is around 1.3 percent per year. Passive funds, on the other hand, can cost much less than 0.5 percent.

If the additional costs of active management run roughly two to three percent annually, then the active manager clearly faces a huge hurdle just to match the results of a passive alternative such as an index fund.

[The information below] compares the ending value of a hypothetical investment (growing at a rate of eight percent per year before fees) at various rates of annual investment expenses. Notice how every incremental percent in costs can add up and reduce your long-term ending wealth.

Comments

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Because no one can reliably predict the future, it should come as no surprise that the overwhelming evidence suggests market timing is a losing proposition.

This is a dangerous myth. It is The Stock-Selling Industry's decision to spend hundreds of millions of dollars pushing this myth that is the primary cause of the economic crisis.

The reality is that no one can predict the short-term future. Trying to figure out where stock prices are headed in the next year or two is indeed a losing proposition. However, long-term timing (changing your stock allocation in response to big price changes with the understanding that you may not see benefits for doing so for as long as 10 years) has always worked. There has never been a single exception in the historical record. There has never been a single study indicating otherwise. There has never been a single logical argument put forward for why long-term timing would not work.

It is critical that investors be informed of these realities. When investors stop engaging in long-term timing (as they did during the Buy-and-Hold Era), there is no way for stocks to return to fair value (as they must if the market is to continue to function) except through price crashes. We are today experiencing the inevitable result of permitting The Stock-Selling Industry's claims that there is never a time when stocks are so overpriced as to be a bad deal go unchallenged for too long.

Indexes are wonderful. But, like everything else, you need to consider the price at which they are being sold before putting money on the table.

This is a great article! In my opinion, one of the best ones on here. It highlights many of the obstacles facing professional fund managers, and why most individual investors are likely better off with low cost passive investments.

There are a few minor details that I could probably nit-pick on, such as that the stock market is not a zero sum game where traders don't technically profit off of each other. (The options market, however, would be.)

That and I think it's important to quote Prof. Sharpe exactly, which is, "The average actively managed dollar will underperform the market, net of costs. To repeat: Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement."

Notice his emphasis on the dollar and net cost calculations, not fund managers. Why is this important? Because there are some fund managers out there that indeed do keep their costs down, but still provide decent management (such as Rick Ferri of Portfolio Solutions, whose expense ratio is 0.25%). Most fund managers charge quite a bit more because, presumably, they like their bigger paychecks. Prof. Sharpe's own article defends fund managers to some degree as well.

Believe it or not, but I do think there is a time and place for active fund managers as well, especially for people who absolutely refuse to think about investing for their future. However, be it passive or active fund management, the bottom line is still clear as day: Costs Matter!

Nearly every article about timing trots out the tired old argument about missing the best X number of days and showing how paltry your returns are.

Of course if you miss the best 25 days odds are you will miss 25 really bad days too. Kind of evens out when that happens. But magically these timers only miss the best days, they don't miss any bad days. Boy they must be bad timers.

Bad days tend to be more bad that good days tend to be good. Wonder what those returns would look like if you only missed the worst 25 days. Well they would argue, that's a straw man, no one can just miss the worst 25 days. Exactly, and no one can just miss the best 25 days either.

It's a really really really dumb argument, but it sounds smart and fools a lot of people because it seems to make sense despite it's high level of stupidity with respect to what actually happens in the real world.

The article is pretty good overall. Most actively managed investments won't beat the market average net of expenses. However I don't think this means active funds are all bad, some WILL beat the average.

Namely what happens from 1993-2010 if you miss the best 10 days (performance drops in half) miss the worst 10 days (performance doubles) or miss the best 10 and the worst 10 (performance is almost unchanged but during the whole period missing both the best and worst gives you slightly better performance than staying fully invested confirming that the bad days are more bad than the good days are good.)

It's also worth noting that in the chart the performance is not that different when missing the best 10 days for almost all of the time period until 2008. Missing the best days during normal markets will hurt performance but not drastically so. It's crashes and snapback recoveries where these results really have the big impacts.

So as rediculous as this statistic is, even if you somehow could miss just the 10 best days and no bad days it still would not be that damaging except if you did it during a drastic crash and snap back rally.

I am not making a statement about the general conclusion. I am just stating that when arguing for passive investing I regularly see the eliminate the best X days argument being made and I am pointing out that is a an argument that is deceptively convincing (which is why it is often used - I suspect most people using it are not trying to be deceptive, they are convinced by its seeming correctness as well) but when you think about how a timer would operate and realize that a timer will miss all kinds of moves up and down then they idea that they only missed the good days (and not just the good days but the very best days) and didn't miss any of the really bad days then it begins to be revealed as a straw man. Furthermore as the chart on the link I posted shows, the differences where not nearly as exacerbated until after the 2008 crash. This also shows that the biggest up days are typically very closely allocated in time to the biggest down days. So if you missed one it is likely you missed the other as well. Thus the miss the biggest 10 up and biggest 10 down is a much closer to expected outcome than would be a miss the 10 biggest up but none of the biggest down days.

Unless of course you were a buy and holder and then panic at the bottom and sell, but I think we all know that's the cardinal sin.

So I wasn't actually offering an opinion on the actual conclusion, just pointing out an argument that has no bearing on the conclusion that was being drawn.

As to the conclusion, since you asked, I believe that timing is futile for most people. Indexing is the best bet for most people. However in a broader context I find myself very much in agreement with the comment above by Rob Bennett. I have looked at his website and reviewed some of his research and find it both compelling and completely logical and common sense based.

For instance, we all look back now and realize the huge bubble in housing. When comparing housing price increases to historical norms one should be able to say that a house today is not as good of an investment as a house 20 years ago. One could use comparable return on rents. One could use price to income. One could factor in interest rates. Housing supply per capita. Any number of measures are possible. But while one can say in 2000 that houses are not as good of a value as they were in 1990 that doesn't mean they will be cheaper next year but it can certainly be a reasonable conclusion from that to expect that the long term expected returns over 20 years from 2000 might be less than they would be over 20 years from 1990 and that the risk of a reasonable or even significant correction in prices is higher in 2000 than in 1990. And by 2005 everyone thinks you are wrong but you are not necessarily wrong. The odds of those things in 2005 are even higher. And the higher they get the less attractive it is as an investment.

So Mr. Bennett's argument is that while you can't predict the short term results of an asset class based on its valuation metrics to previous historical records, you can make a statement that its long term expected returns are lower and its chance of significant correction are higher. And the more out of balance those metrics get the higher the chance of lower returns and significant corrections become. Slowly adjusting ones portfolio to reflect this change in risk and expected returns is a prudent thing to do.

It's really just a step beyond asset allocation. So asset allocation says you always keep your allocation at a certain percentage (perhaps adjusting for age) and as one asset class over performs you will sell some of it to buy the under performing asset class to get back to your expected ratios. If I understand Mr. Bennett's analysis correctly he is arguing for not only adjusting back to the previous percentages but also adjusting the percentages based on the new valuation metrics assessment of risk.

So if the stocks are considered fairly valued by historical valuation metrics maybe you have decided a 50% stock allocation is appropriate. However if at years end stocks are now considered 10% over valued by those same metrics and your stock allocation is now at 55% because of the returns then rather than adjusting back down to 50% perhaps now you adjust your reasonable allocation percentage down to 45% to reflect to over-valuation that is inherent in the current valuation of the stock market.

I am sure great debate could be had over the appropriate valuation metrics but the as I said the concept seems not only logical to me but so common sense reasonable that I find it hard to see how you could reach other conclusions. We assess the value of almost everything in our lives and whether we think something is too over-valued to want to pay for it.

When the PT Cruisers first came out they were in short supply and and a bit of a cult phenomenon. Because of that people paid over sticker for them and got on months long waiting lists for them. If you really wanted one for utility and enjoyment reasons perhaps you considered it worth it to pay for it, but if you simply thought they were nice you probably didn't want to pay over sticker. If you waited a few years you could easily buy them for sticker or below and then you would buy them because they were not over-valued.

We do this with every single asset we buy in life. The fact that determining true value is difficult in stocks seems to make us think that there is no such thing as true value in stocks, but I can't think of any reason why this would be true.

So that long answer is to merely say that I think short term timing is very hard to do but long term timing when properly informed seems like it is the only sensible thing to do and I think it's a shame that the compensation format of investment professionals gives them no incentive to explore this and without that incentive no effort at all of any consequence will be put into helping investors get that valuation information that would help them to the proper allocations to reflect not just the historical average of the stock market's risk but it's current valuation risk which is what really matters.

It's worth noting that while Warren Buffet recommends index investing for average investors, he made and makes all his money doing value based investing by finding companies and stocks that represent a discount to long standing historical average measures of risk and expected return.

As a side note to my comment above about housing. When I said one should be able to say a house today is not as good of a value as a house 20 years ago I was speaking generically. I am not making any comment on house valuations today (I am actually buying as you know so I don't believe that statement). I meant it generically to say that there are points in time when one could make those statements. 2000-2006 seems to be such a time and each year the statement should be stronger. Certainly one should be able to say that today houses are a better value than they were in 2006 so the risk is less now than it was then. Doesn't mean there is no risk, just that relatively speaking, it is less.

And I believe that is the whole point of the historical valuation metrics approach.

"I have looked at his website and reviewed some of his research and find it both compelling and completely logical and common sense based."

Thanks for those kind words, Apex.

Studying these matters has been my life for the past eight years. I have come to the conclusion that the entire economic crisis was the result of one very unfortunate mistake. The people who developed Buy-and-Hold moved us forward in a very important way by warning us not to engage in short-term timing. But then they ASSUMED that long-term timing is also suspect. And nothing could be further from the truth. The entire historical record shows two things beyond any question whatsoever: (1) short-term timing never works and is to be avoided; and (2) long-term timing always works and is required for those hoping to have a reasonable chance at long-term investing success.

I believe that we are going to be seeing the greatest surge of economic growth in our history once this becomes common knowledge. Unfortunately, people have become so suspicious of the word "timing" that it seems likely that it is going to take another stock crash before many people will even look at the idea. It's painful to watch what is going on. But I believe that there will come a day when we will all pull together on this and get things on a better track.

"As for Rob Bennett's ideas, please be careful. He has a... colorful past."

It would be fair to say that my investing views are controversial today. I do NOT offer the conventional wisdom.

I suggest that anyone interested in learning more about the ideas do what Apex has done. Go to my site and check out the articles and podcasts and calculators there. If you have questions, ask at my blog and I will do what I can to help out. If you want to hear what my critics say, enter my name in the Google search engine and sites will come up at which they put forward their criticisms. It's all out there on the internet somewhere, both the praise and the put-downs.

My personal hope is that the day will soon come when this will be less about me and more about the ideas, which I believe are the most important ideas yet put forward in the history of investing (that's not a brag -- I did not come up with these ideas by myself but through interactions with thousands of my fellow community members and with some of the biggest name experts in the field, a good number of whom have endorsed my work [please see the "People Are Talking" section on the left-hand side of the home page of my "A Rich Life" blog]).

I thought about what I've typed above, and I have a feeling that I'm going to be called out to prove why I've gone so far as to point someone out. Please remember that it's not my typical policy to do so. It's just that I've seen and conversed with him elsewhere before, and I don't think some readers realize just how infamous of a troll he is....

This has happened so much for so long that some have gone so far as to create a site just about him.

We also strongly agree that I am not God and that I am perfectly capable of making mistakes.

That's why I have been saying since the first day (May 13, 2002) that the proper way to handle this is to discuss the new ideas fairly and completely and in a warm and civil way so that as many community members as possible are drawn into the discussions and feel safe in offering their sincere takes both pro and con. That's the way it is done with every other investing topic and that is the way it should be done when the question is whether it is essential that long-term investors engage in long-term timing or not.

We'll have to work this out as a community. In time, there will be more and more sites and discussion boards and blogs discussing these ideas. Then the pressure will grow for those that have so far refrained from doing so to get with the program and to explore them and comment on them and either point out weaknesses or encourage more people to take advantage of the good stuff. All that is to the good. All that is wonderful.

What's not so wonderful is the sort of material seen at the ridicule site to which you link. I think it would be fair to say that anyone who finds merit in the way in which that board is run does not have a serious interest in learning how to invest effectively. Valuation-Informed Indexing was obviously not intended for such people and such people should obviously feel free to opt out of the discussions altogether.

I applaud you for deciding to handle this in a civil and responsible manner, and I hope that we can continue to do so.

Believe it or not, but we have debated in the past, in different forums, and unfortunately, I didn't get any reasonable responses to any financial questions. Instead, I was treated with negative responses questioning my character instead. And that's only with my own direct experiences.

As for the link site, I agree they do not treat you nicely. I will not defend their actions that way, but there are still many legitimate questions on there that has been left unanswered. My own questions were left unanswered.

I have heard Rob's ideas and himself personally questioned in the past. But I have never heard anyone get into what it is about his long term valuation adjustment to stock investing that is so objectionable to some.

I don't really care about his "colored past." I don't care about who the ideas are associated with. The ideas stand on their own. They are either correct, mixed, or wrong. I can find very little to disagree with in the overall broad context of what he is proposing.

It would be of great addition to the discussion if you could detail what it is about his ideas that you think are wrong or misleading. If I have been duped by his colorful past I would like to know how rather than just being told he is a troll.

You referenced his half truths. Can you please describe which truths are "half" and why? I truly want to know what it is that others find misleading about his ideas or how he presents them. (Alleged Troll behavior is not important unless it is being used by him to mislead or misrepresent)

Could you list your basic questions to him so I can think about them myself. I don't even have any questions that come to mind for me to question so I am interested in what other people are questioning him about.

"I will not defend their actions that way, but there are still many legitimate questions on there that has been left unanswered."

Then we need to have those questions examined in a different venue, Eugene.

I suggest that you send an e-mail to FMF letting him know your question and asking that he post a Guest Blog Entry by me in which I state the Valuation-Informed Indexing take. Then of course those who don't buy into that take can offer their views in the comments or in follow-up Guest Blog Entries or whatever. If FMF has other things on his agenda, take your case to other bloggers. Try J.D. Roth at Get Rich Slowly or Sam at Financial Samurai or whoever happens to be your favorite blogger.

That's how you find out the answers to your questions. You are wasting your time at that ridicule site. The owner of that site has made an emotional decision to put his fingers in his ears and pretend that he has always known all there is to know about investing and that he can never learn anything from anyone else. Once someone gets on that path, learning becomes a logical impossibility. There's not one person alive who doesn't benefit from learning more effective investment strategies. So every single one of us should be on the same side re this one.

i obviously do NOT mean that we should be on the same side on the substantive questions. We can never learn anything if we are all saying the same thing. We need people representing every point of view if we are to move forward together over time. But we all should be in 100 percent agreement on the PROCESS questions. That ridicule site shows us how NOT to do it. Let's all work together to handle things in the opposite way of how things are handled at that site and I am 100 percent confident that we will all be pleased with the results.

I of course include Rob Bennett in the "all." Rob Bennett has learned from the first day of the discussions and is grateful for all who have helped him do so. That group of course includes thousands of Buy-and-Holders. I don't know what name you use in other forums but my strong hunch is that I have learned important things from you over the years, Eugene! This is all about me (and the thousands of others who have expressed a desire that honest posting on these topics be permitted) seeking to return the favor. You have earned a learning experience and I am going to do all in my power to see that you get it!

When we put the tactics employed at the ridicule site behind us, we all gain. I am not even able to imagine any scenario in which this would not turn out to be a win/win/win/win/win. It might be that we will learn that Valuation-Informed Indexing is full of holes. If that's so, we need to learn that. And it might be that we learn that Buy-and-Hold is full of holes. If that's so, we need to learn that. My strong hunch is that we are going to learn that Buy-and-Hold has many wonderful aspects to it and that Valuation-Informed Indexing adds some important pieces to the puzzle that the smart and good people who came up with Buy-and-Hold just were not aware of at the time they first developed the concept.

My own questions are mostly placed in last link I've provided above. Questions that I've never gotten answers to.

Rob Bennett was eventually banned from Get Rich Slowly, even though JD (the author of GRS) gave him a lot of slack, and even posted some of his comments and even a guest entry on his blog. Here is an excerpt from him about GRS, presumably sour about the banning:

"Take a look at the numbers for the Get Rich Slowly blog and for mine. I think it would be fair to say that the primary reason why his numbers are 100 times better is that he promotes Get Rich Quick investing strategies and I do not. The same emotional phenomena that applies for blogs applies for selling stocks. Tell people what they want to hear rather than what they need to hear and you can make a quick buck. But at what long-term price to your readers' hopes to be able to retire someday? "

This is completely false. Get Rich Slowly does NOT advocate Get Rich Quick.

And again, that's just from GRS alone. My experience with Rob runs all the way back to the days of Bogleheads and Morningstar.

However, in all fairness, the past is the past, and today is a new day. I don't disagree with the general assertion that long-term outlooks tend to be bullish. That's the half-truth. However, it's the solution of Value-Informed indexing, which I have questioned in the past, that I disagree with.

Your links are forums with hundreds of posts per topic. You expect me to read through those and try to find your objections?

Why can't you excerpt and paste your objections in a post here?

From what I can tell of the general posts on those forums, its all a big fight over who believes what, how strongly and how much one person thinks the other is spouting a religious adherence to one philosophy over another. Which is pretty much what I expected.

The topic boils down to a few critical points from my perspective.

1. Do markets in stocks represent greater value and or risk during some periods of time than others.
2. Are there reasonable ways to identify when those balances are shifting and does taking appropriate responsive action improve long term outcomes?

If #1 is true but #2 is unclear then research and exploration into #2 would be valuable.

If instead we say EMH is well established and anyone who thinks differently is a denier and must come with absolute proof or get lost then I guess I don't have much to learn from those people because they don't have much to offer.

And just to be clear, I am only talking about the idea that markets represent different value at different times. I know Mr. Bennett has alluded to the idea that if we could get this all right then it would release an economic prosperity explosion. I don't see any correlation to getting this right and economic activity other than a little bit more efficient allocation of resources that prevent the excesses that happen at the end of bubbles assuming we could end bubbles which I highly doubt. That might have moderate economic benefit but I don't see any reason why that would explode the GDP growth or anything like that. I am only talking about not having people invest their money in things that are likely to be highly over-valued and thus result in lots of people losing money or experiencing very sub-standard results.

If I am wrong about that, all the better. But I am only interested in determining how to make wiser investment choices. I don't expect to see an end to the boom bust cycle by better understanding value investing. I just want to stay out of the direct path of the hurricane.

Apex, I think you missed another one of my posts again (not your fault or anything). I've provided two links in my last comment that will focus in on my own questions. As request, I will also copy/paste my questions here:

"I see. So while you advocate "value informed" investing, you do not participate in it? Or is this what you mean by it?

Despite our on-going recession and the dot-com bubble, buying and holding between 1996 to 2009 yielded an average return of 8.47%. This is using Prof. Shiller's PE data.

If you feel that is cherry picking or is not long-term enough, Prof. Shiller's data goes all the way back to 1871. The average return from there is 10.59%."

"Rob, care to comment on this? If value-informed indexing is superior, why are you only in CDs and TIPs? And if that is indeed value-informed investing, why does it not beat buy-and-hold over the stated time period?

And while I'm here, the average P/E in 1996 was 17.38, and yet, Shiller's P/E 10 shows 24.76. According to P/E 10 then, the market was under-valued at the time. Why then did you switch to TIPs and CDs?"

"(The most likely 10-year return on stocks when the P/E10 level is 25 is 1.6 percent real.)

How did you arrive this? What years did you use for calculation? The only dates you have provided so far is 1996, when you switched to CDs and TIPs (which is nothing like the stock selection method you are explaining now). Between 1996 to 2006, the annualized return, adjusted for inflation-- based on Prof. Shiller's P/E 10 data-- is still 6.97%.

That or if you want to look at all of the stock market history, Prof. Shiller's data shows that the market returned an annualized, inflation-adjusted return of 6.68%.

So, where are you getting 1.6%?"

"Oh, I almost forgot to mention this, but just for clarification, the average market valuation in 1996 was 17.38.

However, according to Shiller's P/E 10, it placed the market valuation at 24.76 instead.

In other words, the market was UNDER-valued, not over, as it had 7.38 basis points to climb before reaching your notion of "fair market value".

That is, unless your notion of fair market value is an arbitrary and static 14.25 instead. But if so, why? That is not how Prof. Shiller's P/E 10 works.

In any case, value-informed investing should have indicated that 1996 is a time to buy into the market, not sell. And yet, that was the same year that you turned to TIPs and CDs instead. Why is that?"

This is a demonstrably false claim. J.D. and I exchanged e-mails just a few days ago re a Guest Blog Entry of mine that he will be running at the "Get Rich Slowly" blog in mid-October.

There is an argument that can be made that J.D. has come very close to banning honest posting re investing at his forum. I started a thread called something like "Buy-and-Hold Is a Get Rich Quick Scheme" (I don't recall the precise title at the moment -- that was the general idea). We had a good discussion with lots of good comments. But at some point he wanted to shut the thread down. And the way he went about doing it was to send e-mails to everyone participating on the thread asking them not to post further comments. I think it would be fair to describe that effort at site administration as EXCEEDINGLY strange.

I find J.D.'s non-investing material to be top notch. His blog is one of my absolute favorites. But it is a stone cold fact that he promotes Buy-and-Hold Investing at his blog and it is also a stone cold fact (at least according to every bit of historical data that I have ever been able to find) that Buy-and-Hold is the most dangerous Get Rich Quick scheme ever concocted by the human mind. Not by intent, to be sure, but that's the reality all the same.

We are now in the second worst economic crisis ever seen in the United States because The Stock-Selling Industry has spent hundreds of millions of dollars promoting this Get Rich Quick scheme. Is it a thought crime to point this out on discussion boards and blogs? Are we permitted to post our honest views? Are we ever going to be able to recover from this economic crisis if people do not start talking openly about the dangers to all investors and in fact to our entire society that follow from widespread promotion of Buy-and-Hold?

The stock market was overvalued by $12 trillion in January 2000. Even John Bogle, Mr. Buy-and-Hold himself, acknowledges that Reversion to the Mean is an "Iron Law" of stock investing. So anyone paying even a tiny bit of attention knew in 2000 that our economy would be losing $12 trillion worth of buying power over the next 10 years or so. Do we really have to look any further to determine the primary cause of the economic crisis? Was there any possibility that our economy could lose $12 trillion worth of buying power and not collapse?

I do not say that the Buy-and-Holders intentionally caused the economic crisis. They made a mistake. They learned that short-term timing doesn't work and jumped to the conclusion that long-term timing might not be required. But that is wrong. There are four times in history when large numbers of investors began ignoring price when setting their stock allocations. We saw a wipeout of all of those investors and an economic crisis for the entire society on each of those four occasions. I am beginning to detect a pattern.

When we learned that long-term timing was required (the academic research has been showing this since 1981), we should have told middle-class investors about it. Our failure to do so caused this economic crisis. If we permitted middle-class investors to learn the realities, the numbers show that we would likely see the biggest surge in economic growth in our history. The only price that we need to pay to see this happen is to persuade the Buy-and-Holders to say the three magic words "I" and "Was" and "Wrong."

There is no one alive who feels more respect and affection for the Buy-and-Holders than Rob Bennett. All that Valuation-Informed Indexing is is Buy-and-Hold with the Get Rich Quick element removed. So I am happy to work with any Buy-and-Holder to take things to a better place than where they are today. But I am not willing to post dishonestly re what the entire historical record says about how stock investing works. That should never have become a requirement for admission to any discussion board or blog community.

There are millions of people suffering very serious pain today because of the mistakes made by the Buy-and-Holders. It does no one (this goes double for the Buy-and-Holders themselves!) any good for this charade to continue. Buy-and-Hold is a data-based approach. When you endorse a data-based approach, you take on a responsibility to report what the data says accurately. There has never been a single study indicating any reason why long-term timing would not always be required. It is not even possible for the rational human mind to imagine how there ever could be one.

I will always have the hand of friendship extended to J.D. and FMF and all other Buy-and-Holders. I respect them. I care for them. I want to be able to learn from them. But my respect and affection for them does not permit me to encourage them in their decision to walk down this dark road they are on today. If they believe that long-term timing is not required, they should state why they believe this. If they understand why long-term timing is required, they should report on the reasons to their readers.

We need to turn this around and get headed to a more positive place. Causing a worsening of the economic crisis benefits precisely no one. The longer this goes on, the harder it will become to rebuild our economic and political systems. We all need to look deep inside and ask ourselves why it is that we got into this field in the first place. My strong hunch is that even the most abusive of the Goons did not do it with the intent of bringing the global economy to its knees. So I pray that a good number of us will soon develop the humility needed for us to say those Three Magic Words.

From the day we work up the courage to say those words, it just gets better and better and better and better. It's all upside and zero downside. Learning Together is one of life's true free lunches! I look forward to the fun we will all be having together when we turn the corner re this one and begin rebuilding our economic system instead of fretting over its continued collapse. Rebuilding is a whole big bunch more life-affirming that watching dumb-founded as all that we have spent our lives building up collapses around us. Heaven help us all!

"I don't disagree with the general assertion that long-term outlooks tend to be bullish."

Bullishness and bearishness has nothing to do with any of this. The dispute is over whether we are permitted to look at what the historical data says when deciding on our stock allocations.

In 2000, the historical data showed that the most likely 10-year annualized return on stocks was a negative 1 percent real. Treasury Inflation-Protected Securities were paying 4 percent real. So each dollar that Buy-and-Holders put in stocks was likely to cost them 5 percentage points of return for each of 10 years running. Do the math and that's a loss over 10 years of 50 percent of the initial portfolio value.

That's one investor. Now imagine millions of investors following a Buy-and-Hold strategy. Now you've got millions losing 50 percent of their lifetime savings. That's why people do not feel they can afford to spend today. That's why we are in an economic crisis.

No one WANTS to lose 50 percent of his lifetime savings. So, if we were permitted to talk about the realities of stock investing on the internet, this would obviously not be a problem anymore. But there are a good number of Buy-and-Holders who very, very, very, very much do not want discussions of the realities to be permitted. It pains them to admit that they have made terrible mistakes.

I have all the sympathy in the world for the people who made the mistakes. I believe that we should be offering the hand of charity to them. I do not see it as an act of charity to encourage them in their illusion that there is some magical world where the price you pay for stocks does not affect the long-term return you obtain from investing in them. I say that we should tell people the realities. I believe strongly that that is the answer to all our problems.

We are a dynamic society. All of our advances have come from discovering new things about the world. We permit Free Speech so that people can learn about these new things even when there are vested interests that would prefer that the word not get out. I believe that we should apply the same practices that have worked such wonders in the fields of medicine and transportation and electronics and a thousand other fields to the field of stock investing.

Today's suffering is 100 percent optional. We place our trust in the system that has worked for us for so many years and all this darkness goes away. The Buy-and-Holders advanced the ball. The Buy-and-Holders are humans, like all the rest of us. The Buy-and-Holders made terrible mistakes. It is our job as their friends to point out those mistakes and get them corrected as soon as possible. If the Buy-and-Holders were thinking straight, that's what they would want us to do.

We all have had times when we didn't want to admit a mistake. Has any of us ever experienced a single occasion in which failing to do so ended up being a long-term plus? The best thing to do when you learn about a mistake that you have made is to acknowledge it, get it behind you, and move on to more fun things. It is not the mistake that is the problem here. It is the long-term cover-up. That problem gets worse the longer we let this drag out.

"If #1 is true but #2 is unclear then research and exploration into #2 would be valuable."

This is the entire eight-year debate summed up in a few words.

Everyone I have ever spoken to agrees with Point #1. There is a small number who share my take on Point #2. There is a large number who wants to learn more about Point #2 so that they can develop a better-informed take. And there is a small number (mostly people who have published books or calculators or studies advocating Buy-and-Hold) that very, very. very much do not want the discussions that we all need to have to learn more about this go forward.

We need to get over that wall of resistance. Skepticism re new ideas is healthy. Abusive posting is not. We must bring the abusive posting to a total and complete stop. We need people of responsibility and influence to step forward to make this happen.

From that point forward, it's all good. But the more people there are who get tangled up with the abusive group, the harder it becomes to pull this off. So we need responsible people to act quickly and forcefully, before even more damage is done.

I of course am happy to explore any of your concerns in great depth, Eugene. As you know from our prior dealings, I have responded to each of the questions you raise here on hundreds and hundreds of earlier occasions.

This isn't the place to revisit every question that has ever been asked about stock investing. You need to pick one question that you view as being of the greatest importance and then starting writing to blog owners asking that they request a Guest Blog Entry from me on that question. Then, when the Guest Blog Entry appears, you need to work with me to insure that anyone who shows with his abusive behavior that he came to the discussion with bad intent is promptly shown the door.

Then you move on to your second question. And so on.

That's how it works in all other fields of human endeavor. That's how it needs to work in the stock investing realm as well.

"It is also a stone cold fact (at least according to every bit of historical data that I have ever been able to find) that Buy-and-Hold is the most dangerous Get Rich Quick scheme ever concocted by the human mind."

Is that really a stone cold fact? Can you provide empirical proof for this?

"In 2000, the historical data showed that the most likely 10-year annualized return on stocks was a negative 1 percent real. Treasury Inflation-Protected Securities were paying 4 percent real. So each dollar that Buy-and-Holders put in stocks was likely to cost them 5 percentage points of return for each of 10 years running. Do the math and that's a loss over 10 years of 50 percent of the initial portfolio value."

That's cherry-picking a time frame that suits your argument.

"There is a large number who wants to learn more about Point #2 so that they can develop a better-informed take. And there is a small number (mostly people who have published books or calculators or studies advocating Buy-and-Hold) that very, very. very much do not want the discussions that we all need to have to learn more about this go forward."

I disagree. In the GRS threads, I've asked for the composition of your portfolio (#2), but did not get an answer. So, I guess this my chance again. What exactly is #2? All I got last time was TIPs and CDs.

There is no wall of resistance. Unless you mean people disagreeing with your concept of value-informed indexing?

"I of course am happy to explore any of your concerns in great depth, Eugene. As you know from our prior dealings, I have responded to each of the questions you raise here on hundreds and hundreds of earlier occasions. "

I have to disagree, sir. According to the threads from which the questions originated, you've had ample opportunity to respond to them, but did not do so. I even recall one time you promising that you will provide an quantitative analysis "next Tuesday" but that never materialized.

And nothing stopping you from answer those original questions now. Would you like to answer any of them, since they're all the same set regarding Prof. Schiller's data that you've base your value-information from?

I don't know why you're pushing the idea of a guest post when you can answer the questions here and now. And if you want to include anything that would be in a guest post -- you can put it in the comments here.

"I don't see any correlation to getting this right and economic activity other than a little bit more efficient allocation of resources that prevent the excesses that happen at the end of bubbles assuming we could end bubbles which I highly doubt. "

There are lots of smart people who agree with you, Apex. I do not. I do indeed believe that we can eliminate bubbles just by opening the internet up to honest posting re stock investing. And, by eliminating bubbles, we can come pretty darn close to eliminating economic crises.

We have had four economic crises since 1900. Each and every one was preceded by a time when we went to valuation levels of double fair value. Eliminate bubbles and you come pretty darn close to eliminating economic crises.

Is it hard to eliminate bubbles? I sure don't see why it should be. Every investor alive wants higher returns at lower risk. That's what Valuation-Informed Indexing provides. So why would anyone who knew about this approach not follow it? It's impossible to come up with any logical reason.

When all investors become Valuation-Informed Indexers, bubbles become a logical impossibility. Market prices are self-correcting. Each time valuations go up, the long-term value proposition goes down. Each time the value proposition goes down, Valuation-Informed Indexers sell stocks to lower their allocations. That pulls prices back down to fair-value levels again. There is no possibility of overvaluation ever becoming a problem in a world in which investors have access to accurate information re how stock investing works!

The bottom line here is that Fama almost got it right. Fama theorized that the market SHOULD be efficient (that is, that prices should be set properly). He is right! The market should indeed be efficient and the market very much wants to be efficient. There is only one thing that stands in the way -- the marketing efforts of The Stock-Selling Industry.

The Stock-Selling Industry wants to sell stocks. That's what provides them those million-dollar salaries. But in the age of the internet we no longer need to be dependent on The Stock-Selling Industry for information on how to invest. We can (at least theoretically) post honestly on blogs and discussion boards and all this sort of thing. Once we begin doing that, we have solved the problem. People will begin investing effectively and the market will be efficient from that point forward.

Fama failed to consider the marketing efforts of The Stock-Selling Industry. That's the entire problem. We fix that one by opening the internet up to honest posting. All the rest just falls into line once we do that.

Having some means by which to learn the realities is important. That's what it all comes down to. The world changes when humans gain a means of learning the realities. We have achieved huge progress in all sorts of fields by letting people learn the realities. I see no reason why what worked in all these other fields would not work in the investing realm as well.

We need one place at which we can begin spreading the word. Then it will all go viral. No more bull markets! No more bear markets! No more economic crises! Lots more economic growth!

All of your questions will be answered by thousands of community members if you and few others will get to work bringing the Campaign of Terror against our board and blog communities to a full and complete and total stop. People love learning about exciting new investing ideas. People hate being exposed to the smelly garbage we see piled up in mounds at the site you linked to above.

We need people of intelligence and integrity participating in the discussions. We've got to all work together to take out the garbage if we are to have any realistic hope of persuading them to participate.

"I don't know why you're pushing the idea of a guest post when you can answer the questions here and now. And if you want to include anything that would be in a guest post -- you can put it in the comments here."

Every question that Eugene has asked has been addressed on hundreds of earlier occasions, FMF. Why is he not able to remember the answers? Why have you not learned about them in the many years during which these discussions have been ongoing?

People are repulsed by the tactics being employed by those still "defending" Buy-and-Hold 30 years after the academic research showed that the chances of it ever working out in the real world are precisely zero, FMF. If we want people of integrity and intelligence participating in the discussions, we are going to have to permit some minimal levels of human decency and self-respect and respect for others.

There are rules prohibiting the tactics that have been employed by Eugene at every board and blog at which I have posted, FMF. Why do those rules exist if the site owners see no merit in permitting civility in discussions of stock investing?

I think it is fair to say that, if this discussion involved any question other than the Big Fail of Buy-and-Hold, you would be speaking up In FAVOR of permitting honesty and civility, FMF. The fact that you feel drawn to post in "defense" of the ugliness tells us something important about why the discussions have proceeded as they have.

The reality is that there is no defense of Buy-and-Hold/Get Rich Quick possible. If there were any defense possible, we would never have seen this sort of behavior evidence itself here or anywhere else. We are looking at a strategy that is 100 percent emotion and that cannot be defended through reasoned human argument.

I'll answer any question that any investor has in a venue in which human decency is being respected. But it would be disrespectful of you and of all of your readers if I were to pretend that this ugliness is suitable in discussions of stock investing.

Why have you not said anything about the material that appears at the site to which Eugene has pointed us several times? Are you repulsed by what you see there or are you not? How does it make you feel as a Buy-and-Holder to know that there are people "defending" your investing strategy with these sorts of tactics?

[i]I'm not posting against honesty and civility or in defense of anything -- where'd you get those ideas anyway? I simply asked why you needed a guest post to put out your opinions.[/i]

I've been pointing out the realities of stock investing in [i]thousands[/i] of posts and articles and podcasts for eight years now, FMF. Eugene has personally participated in those discussions and asked the exact questions he is asking here on hundreds of earlier occasions. He now pretends that he cannot remember the answers.

Do you believe him?

I do not.

Do I believe that you cannot figure out what is going on here?

I do not.

I will help you or anyone else who wants to learn more about the realities of stock investing. A good constructive way to do that would be for you to take one of the issues re which you have questions and have me write a Guest Blog Entry on it and then we could all discuss it (you would need to assure your readers that you would protect them the tactics that have been employed on numerous occasions by Eugene if you were to hope to get people of integrity and intelligence to participate).

That's the way it works in every other area of life endeavor, FMF. And that's the only way it can work in discussions of stock investing.

All those who have wanted to learn have been able to learn about this stuff quickly. You can read the stories of hundreds of such people at my site. There are some who very, very, very much do not want to learn. Most in this group are people who in the past have advocated Buy-and-Hold. I think it would be fair to put you in that category. That's emotion. Working on that one is an inside job. I cannot help you with that one.

Any time you want to participate in constructive and helpful and life-affirming discussions, I will do anything that it is possible for me to do to help you and your readers. I can do no more and I can do no less, FMF.

I don't think that's a fair assessment of my intentions. I simply question your methodology. So, what IS the composition of your value-informed indexing, and where is empirical proof that it out-performs passsive buy-and-hold?

"Every question that Eugene has asked has been addressed on hundreds of earlier occasions, FMF. Why is he not able to remember the answers? Why have you not learned about them in the many years during which these discussions have been ongoing?"

As you can see in the links I've provided, I have tried to ask before. Instead, I was branded, in your own words, as "huffy" and "impatient". This time around, you are accusing me of foggy memory.

But the trouble is, you've never detailed your exact composition. At least not to me. And something like that would be very simple to do. So, why not now?

"People are repulsed by the tactics being employed by those still "defending" Buy-and-Hold 30 years after the academic research showed that the chances of it ever working out in the real world are precisely zero, FMF."

I think you are confusing me for someone else. I'm not an ardent defender of buy-and-hold. Even in this thread, if you look at my very first comment, I've even conceded that there are some occasions for active fund managers.

Also, where is your proof that buy-and-hold working out in real world are precisely zero?

Finally, would you like to answer some of my original questions? They are still left unanswered....

Write your thoughts down on your own site and people can ask questions/discuss your thoughts there. There's no need it should be on my site or any other.

And as for your comments above, I don't know what you think "is going on here", but I do not appreciate you implying that I'm being dishonest, subversive, or whatever you're implying (it's difficult to tell.) The only things I have said here are 1) you can put your thoughts in the comments and 2) there's no need for guest posts -- discussions can be held on your site if people really want to have them. That's it.

"Eugene has personally participated in those discussions and asked the exact questions he is asking here on hundreds of earlier occasions. He now pretends that he cannot remember the answers."

I know that's not directed towards me, but I am not pretending. I really do not know. You've never told me explicitly what they are other than "TIPs and CDs", and I prefer not to assume and speculate as to what they may be. Why do that when you are here before us, right?

Furthermore, it appears that you have "evolved" your argument through the years, so what I may have known years ago may no longer be valid.

Finally, if you want readers here to believe your "stone cold facts" about value-informed indexing being better than passive buy-and-hold, then it's perfectly reasonable to ask just exactly what it is and what's in it. If not for me, then at least for readers who are new to your idea.

That's not unreasonable, right?

As for me pursuing this, I actually have no agenda against you. I am not a part of "Hocomania". Again, I just question your methodology, but have never gotten a substantive answer. Just a lot of rhetoric and accusations.

If you hold yourself out as someone helping people with their finances, there is a need, FMF. It's not all about links. It's not all about winning popularity contests.

There are people suffering real pain because of the 30-year promotion of Get Rich Quick investing strategies. You played a part in that. Perhaps you were caught up in the emotion of the moment. Perhaps you made a mistake. That much I can buy into.

But at some point you and the others who have promoted Buy-and-Hold are going to have to start helping out in the effort to bring this economic crisis to an end. There are responsibilities that go with putting up a blog that reports on investing topics.

When you are up for taking some positive steps, I will be available to help out in whatever way I can. You can make a positive difference. It is my belief that there is some part of you that would like to be making a positive difference. I would be grateful if you would make a bit of an effort to get more in touch with that side of yourself.

Thousands of people have been doing lots of good work for over eight years now to mine the insights that you could be sharing with your readers if you worked up the heart and courage to do so. It feels a whole big bunch better on the other side. And the Get Rich Quick stuff is going down in any event. There's only so much more economic pain that we all can take.

I would be grateful if you would try to look at this as an opportunity rather than a threat. It requires a change in what you tell people at the blog, yes. In the long run, though, it is the best thing for you (and of course for your readers) by a factor of 50. How well do you think your blog is going to be doing after the next crash, the one that is likely to put us all in the Second Great Depression?

I wish you the best in all of your future endeavors in any event, FMF. I hope you take this all in the positive spirit in which it is intended.

What a fire storm, I didn't realize my comments would kick off such a war over past wounds and will be wary of going down this path again if that is to be expected.

Rob, while the general concept of markets being over-valued and adjusting allocation based on that makes sense to me, your responses here and means of defending yourself are strange and disappointing, and do not offer much substance other than to put blame on others and ask them to provide venues for you to prove your case.

It's a bit defensive and doesn't shed any light on #2 at all.

FMF's suggestion seems right to me. Given that you actually have your own venue, if there are regular objections you face you would be well served to have an objections page on your own site, list them individually and then answer them and defend your methodology.

What you are doing here is to provide lots of words but those words are not providing any answers that satisfies anyone.

It's disappointing to me because your basic philosophy makes sense to me but the way you have defended it here detracts from it's credibility. Doesn't change my opinion about the theory but it makes it easy for others to deride it.

I am quite baffled by your approach to the whole thing as you continue to engage in a debate about the debate rather than just debating the ideas.

"I do not appreciate you implying that I'm being dishonest, subversive, or whatever you're implying (it's difficult to tell.) "

I believe that you personally follow Buy-and-Hold strategies, FMF. In that sense, I believe you are being 100 percent honest. You are telling others to do what you do yourself.

I do not believe that you have confidence in these strategies. If you had confidence in them, it would not upset you to hear them questioned.

We are living through the greatest period of stock overvaluation in history. Stock overvaluation is ALWAYS dishonest. Think what the word "overvalued" means. It means "falsely valued." It was Buy-and-Hold that caused that false valuation. So I think it would be fair to say that the strategy you promote is fundamentally dishonest.

That's not the same thing as saying that you are conscious of the dishonesty or that you are aware of how much human misery it has caused. I don't believe that you are. I believe that you are suffering cognitive dissonance. I believe that all Buy-and-Holders are. No one wants to invest ineffectively.

The question is -- How do we solve this problem? We need to solve this problem if our economy is to recover. We all want that. How do we get to this place where we all want to be?

I can respond to any substantive question. But I cannot overcome the hostility you feel to having your ideas questioned.

If you can come up with any constructive way to deal with these matters, I am on board. But I cannot help anyone if I do not post honestly. And the reality is that Buy-and-Hold was rooted in a mistake. We need to be able to talk about the mistake to even get to first base. And as soon as I mention the mistake, you and the other Buy-and-Holders become hostile.

That's what needs to change for us all to be able to make progress together.

That's the crux of the issue over the years, Apex. Rob isn't wrong that buy-and-hold has its weaknesses. That's not the problem.

The problem is he then holds up a black box and tries to convince everyone that his invention is the solution. But when asked what's inside, he does not answer it, but instead, goes into some kind of rhetorical FUD or accuse people of mishandling the situation....

Partly though, that's because much of what he used in the past (such as the improper use of Prof. Shiller's PE/10) has already been debunked. And yet, Rob continues on his journey from site to site spreading his words to anyone who will listen.

If his "black box" has been debunked, why then, does he continue on his journey? Think about that for a second, and then, you'll understand why I feel the need to warn people about his ideas.

Contrast this with someone like Rick Ferri, whom I have mentioned earlier. His "black box" is completely transparent. You can see exactly what he will invest your money into in this New York Times article:

As you can tell from that break-down, even Rick isn't a completely passive indexer, but rather, has his own spin on index enhancing. I should also provide a disclaimer that he's also a professional, and from what I've seen, is very knowledgeable in this subject matter.

Agree or disagree with Rick, at least you know what he'll do with your money, and you know upfront how much (or should I say, little) he'll charge you to do it.

And therein lies the point. For anyone who comes up to you and tells you there is a better way than passive buy-and-hold, you should be able to ask, "What in it?" and you should be able to get an adequate, substantive answer back, quick and easy like that.

To date, Rob has not done that, at least not for me, but instead will divert attention elsewhere, such as questioning my integrity, the integrity of other communities, or just spreading general FUD.

"I am quite baffled by your approach to the whole thing as you continue to engage in a debate about the debate rather than just debating the ideas."

I'd prefer the discussion to be about the substantive points, Apex. If everyone would insist that we stick to the substantive points, everyone would get what they say they want.

I do not control Eugene or FMF. They say what they say and I respond to what they say.

I have offered FMF a Guest Post on any question that Eugene wants to ask. That gives FMF the opportunity to take advantage of eight years of work done by thousands of smart and good people who have explored and discussed these issues in good faith at earlier times. I think it would be fair to say that FMF has precisely zero interest in learning the answers to those questions.

I cannot force it. If he suggests an interest in learning the answers at some later point, I am going to be there for him. There's nothing that would make be happier than to be able to help all his readers out by exploring these issues here.

He controls the site. He gets to say whether it happens or not. I don't have magic powers.

You need to be asking yourself why FMF is hostile to the idea of learning about this stuff. I think it is fair to say that it is because he has spent years of his life promoting Buy-and-Hold and it causes him emotional pain to acknowledge that it doesn't work. I of course feel for him. But that is not my doing.

It is of course not only FMF that is feeling this pain. Bogle is feeling it. Bernstein is feeling it. Burns is feeling it. Thousands and thousands are feeling it.

This is a society-wide problem. We are all suffering the effects of this. We know today things about how stock investing works that no group of people before us knew and we cannot take advantage of them because there are all these people in pain that cannot bear to have people learn the realities.

The economic crisis is not a crisis that has its roots in intellectual mistakes. It has its roots in emotional mistakes. You figure out how to get people to develop a serious interest in bringing the crisis to an end, and you may win the Nobel Prize. I will certainly vote for you.

The other way is the harder way. We go into the Second Great Depression and then we get serious. I vote for the easy way. But this is obviously not something that I can pull off all by my lonesome. We got into this as a society and we can only get out of it as a society.

I work it hard. That is all I can do. I cannot force things here. It's not in my power and it wouldn't be the right thing to do even if it was.

You have stated so many unsubstantiated things that are far beyond your basic premise that I am really no longer interested in your answers.

1. It was Buy-and-Hold that caused that false valuation. --- There is no proof of that. Margin percentages got to all time highs in the late 90's, I am sure that had nothing to do with it. Day trading got to levels not seen in my life time, I am sure that had nothing to do with it. etc etc. Buy and Hold may or may not be wrong but it is certainly not the boogie man and the root of all evils. You hold Buy-and-Hold responsible for all that is wrong with investing and the elimination of it as a strict regiment as some kind of financial utopia. I find that extremely naive.

2. Of FMF you said: "I can respond to any substantive question. But I cannot overcome the hostility you feel to having your ideas questioned." and "You need to be asking yourself why FMF is hostile to the idea of learning about this stuff." --- That's just ignorant and pathetic.

3. "I'd prefer the discussion to be about the substantive points, Apex. If everyone would insist that we stick to the substantive points, everyone would get what they say they want. I do not control Eugene or FMF. They say what they say and I respond to what they say." --- Screw what they say (and I don't even know what you are talking about with FMF, he didn't say anything), why are you so defensive and spend all your time defending yourself rather than defending your theory. If you just stick to the substantive points those who are making distractions will get drowned out but all you do is debate the distractions rather than the substance.

I can see now that the problem is that you are far beyond the basics of your theory as I understand it. You are into a war on buy and hold and some kind of Al Gore save the planet type of crusade that you believe will forever usher in an investing utopia if we can just eliminate pure buy and hold investing.

I don't believe a thing you have stated here beyond the basics that markets get over-valued and being fully invested in them at all times is not always the best course of action.

Beyond that basic assertion I retract any endorsement I stated here or implied by defending what you do as it appears you have other agendas that I do not support.

You are going to find you are regularly a lone voice if you continue to approach things in such a personal and accusatory manner. You took your one defender here and turned him into a detractor in less than 24 hours. If that was me I would reconsider my approach.